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Future Inequality, According to the CBO

December 27, 2012 12:46 pmDecember 27, 2012 12:46 pm

Aha: in its long-term assessment of Social Security (pdf), the CBO makes its assumptions explicit. Kudos to them for doing this, by the way; even if you disagree, it’s helpful to know how they arrive at their conclusions.

So, what CBO assumes, first off, is that the share of compensation in GDP will remain constant. Here’s what that share has looked like since 1973, which marked the end of the postwar boom:

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Credit

Clearly, this share fluctuates with the business cycle, but is there are trend there too? In effect, CBO is writing that decline over the past decade off as a blip rather than the start of a major redistribution from labor to capital.

Meanwhile, CBO does allow for some rise in earnings inequality, causing the taxable share of earnings to fall slightly as the share of earnings above the payroll tax cap rises; they project a fall from 85 to 83 percent between now and 2036.

How does that compare with the trend over the past few decades? If you look at the data here, you see that the taxable share of earnings has also fluctuated a lot with the business cycle — but if you look at business cycle peaks, there’s a pretty strong downward trend, from 87.3 in 1979 to 82.6 in 2007. So CBO’s prediction implies a lot slower rise in earnings inequality over the next few decades than in the past.

I’m not bashing CBO here — I understand what they’ve done, and I would probably have ended up doing the same thing in their place, if only, as I remarked in a previous post, because dystopian visions of a class-riven society and official agencies don’t mix very easily. The point, however, is that CBO could very easily be quite wrong here, and will indeed be very wrong if the rise of smart machines plays out as many suspect it will.